Full transcript

Announcer: It’s the weekend, which means it is time for Jill on Money. The show that makes money fun and just happens to answer all your financial questions. Here’s your host, Jill Schlesinger.

Jill: Welcome back. It is hour number two of Jill on Money and, as promised, we have a fantastic guest who is making a reappearance. I think you have been on the show a couple of times before, but not for a while. Mitch Tuchman is the Managing Director of Rebalance and on the forefront of the entire robo-advisor movement. So, without further ado, Mitch Tuchman. Welcome back to the show. How are you?

Mitch: I’m great Jill. How are you today?

Jill: I’m great. Do you feel like you were one of the first people to say “Hey I knew about this before it was famous and, you know, what’s going on here?” You were really the guy weren’t you?

Mitch: Well, you know, they say pioneers are the ones with the arrows in their backs.

Jill: Oh dear!

Mitch: I think so far we have avoided that, but no, we have been at this for a while and I think what we are now witnessing is a general retooling of the whole financial services industry where consumers are going to be getting a better deal. Not only have we been advocating a different way of investing for retirement investors, but now even the U.S. Department of Labor is about to win a David and Goliath style fight that’s going to get everyday investors more information about what funds their brokers have been putting them into and I think all is going to be better for the retirement saver and the investor.

Jill: That’s so great. So Mitch, let’s just go back a little bit. Tell us about your background first of all and what made you form this company called Rebalance.

Mitch: Basically, I was an entrepreneur for the first 15 years of my career here in Silicon Valley. I built up a company, sold it and had money to invest. I think I told you my personal story, but my son was born about that time with severe disabilities and I realized I better figure out how to invest this money not just for me, but for 50 years after I’m in the ground. If I did not save money there would not be enough to take care of him so it was a very, very personal and deep issue for me. I began to look for my options and I have a background in finance; I got an MBA many years ago at Harvard, so I knew something about the advice I was being given by people in financial services and none of it really made a lot of sense to me. So, I asked a friend who ran a hedge fund and through a very back-ended way I got into this business. I ended up managing money for about 8 years and I learned what the big institutional investors do, the ones managing endowments and retirement funds and paying IBM retirees their money every month, those sort of investors. They spoke a completely different language than Wall Street financial services people and they thought about investing completely different. I realized, again, as an entrepreneur that there was a way to bring this to everyday investors. That was the genesis of all of this; we first launched an automated robo-investing service, however, by listening to our clients we learned that they wanted a more human touch. The clients were mostly over 45 years old, they were baby boomers and needed somebody to talk to them about how to put all of the pieces together, and when you’re over 45, life gets a little more complex. Rebalance is the answer to that need; we have human advisors on the phone with our clients, but still have the benefits of the low-cost, “robo-investing,” as the investment management tool for the money that we handle. We formed Rebalance in order to address a broader need of people who really want to hand this over to somebody, but want to do it in a way that makes sense for them financially.

Jill: So, presuming that, you know, you do-it-yourself. You go to Rebalance360.com. Walk us through a process of what occurs there and then we’re going to go more in-depth about the service.

Mitch: Rebalance is where a credentialed, seasoned financial advisor will get on the phone with you, take you through what we call a “diagnostic,” a whole series of thoughtful questions, try to understand who you are, your family, your needs, the money that you have to invest, all of the things that a good planner would do. You used to do that, Jill.

Jill: Oh yeah, 152 years ago.

Mitch: Exactly. Query the client, find out what they need, recommend a course of action and then, if the client wants to proceed, we move their money into an account at Schwab or Fidelity. We do all of the management of the money, and are in continual touch with the client, to make sure that if there are changes in their life or different decisions that need to be made that might impact how their money is invested, we have a seat at the table with them in helping that happen.

Jill: That’s great. So, we’re talking to Mitch Tuchman, of Rebalance. You are the Managing Director of Rebalance, correct?

Mitch: Well, yes. My partner Scott Puritz and I both manage the company together. We’re now managing about $360 million and it is going great.

Jill: Wow, that’s amazing. When we come back, we are going to talk a little bit more about Rebalance. We will link to that in our show notes so don’t worry that will be there, but we’re going to make sure that you understand why this model, this sort of a hybrid model, this can be a lot cheaper than going to a traditional brokerage firm. So, when we come back with Mitch Tuchman he’s going to explain some of the perverse incentives that exist in the universe of financial services.

Jill: You’re back with Jill On Money. We have a great guest here, Mitch Tuchman. He is the Chief Investment Officer and Managing Director of Rebalance. Mitch, I’m just laughing because, you did mention the U.S. Department of Labor Rule and we’ll get to that in a second, but I wonder – did you see how the industry was going to change when you first came up with this concept of using technology to help investors – did you think that there was something brewing in the investment world that you knew that we didn’t?

Mitch: Basically, whenever you have an industry that makes way too much money for providing very little value there is something great about our American economy and innovators and entrepreneurs that seek and destroy that inefficiency. In having lived in Silicon Valley for over 30 years, I’ve watched this happen in industry after industry after industry. So when I got involved in financial services I began to realize oh my God, this industry basically syphons a third or more of the available returns out of people’s pocketbooks year in and year out (tens of billions of dollars) and not only do they provide nowhere near the value commensurate with the amount they charge, but they are actually hurting people and I know, as I’ve been around for a while, that will cease to exist through innovation. So, maybe I was one of the first to see it, but I’ve been followed by other great companies that have been funded by hundreds of millions of dollars of venture capital and finally the financial services industry is having to retool itself. You know Jill, the way I look at it, I was around in the early ‘70s when I got my driver’s license and you’re a little younger than I am or a lot younger …

Jill: A tiny bit.

Mitch: … but I was in line waiting for gas. When the gas prices hit, and when your eyes would water because the pollution was so bad, the auto industry had to retool itself and get regulators involved. To get the car makers to get gas mileage up and pollution levels down, there had to be competing forces that exposed what was wrong with the current model. I see firms like ours doing something very similar to this market of financial services, in terms of causing a change.

Jill: Well, I mean then how do you compete if Schwab just turns on its services? Would that be hard for you? In this environment all of the big firms are starting to do acquisitions, whether it is an insurance company buying a robo or, just even recently, Goldman Sachs bought Honest Dollar, and that was for retirement services. Is it your intention to kind of maintain your independence or would you sell out to someone who wants to come along and say hey this is a great idea we’ll buy you, we’ll scoop you up?

Mitch: Well, that is not our intent. My partner and dear friend, Scott Puritz, and I have already had very successful careers as entrepreneurs and while we would like Rebalance to make a profit, we call it a social double bottom line. We want to do some good in the world, so we may not make the best acquisition target because we are not charging the kind of fees that are exciting to those who would want to acquire us. While there are new companies coming out and acquisitions happening, the fact is, Jill, people listening to this show right now likely are using a broker or an insurance agent to manage their retirement money. Likely a friend of yours that you play golf with, someone you met at the school or the country club, who is very trustworthy, who convinced you to let them handle your retirement money; and those folks still manage a predominant amount of retirement money out there. And they are doing it with a flawed model and the flawed model is now under scrutiny and being changed by the Department of Labor. Firms like ours have retooled to operate under these new regulations, which effectively bring people’s fees down by two-thirds in most cases. There are a lot of winners that are going to be out there over the years, but still the brokers and the commission-based sales people in this business dominate how most money is being managed and I do not see that changing for at least a decade.

Jill: Really, that long? I’m actually surprised – a decade. Is that because assets are sticky in this business meaning that it is hard to change?

Mitch: Yes. I had a woman on the phone yesterday and we demonstrated to her that we were going to save her at least two-thirds in fees and this is an older woman and she had been working very, very hard for many years and she had several hundred thousand dollars, but you know this was a substantial amount of money that we would save her every year. Also what happens, as you know Jill, is when a commissioned-based person is managing your money over time your portfolio begins to look a little bit like a yard sale; they are not focused on how much should this client have allocated to the U.S. market or foreign markets or bonds, which is really where all of the money is made in those decisions. Rather, it’s “what can I sell to this client today to make some commission.” That thought process leads to these horribly out of line portfolios. We showed this potential client how we could lower her fees dramatically, how we would manage her money in a superior way and she said “Oh my God, I want to do it. I’m ready to go but then I got to call Keith and tell him and he’s like a son to me at this point. I just don’t know that I can do that” and literally she has been wringing her hands for over a month just trying to pick up the phone to break up with her broker and that’s the answer to your question, that’s why this is going to take at least 10 years.

Jill: That’s amazing.

Mitch: These relationships are strong and they are full of trust and unfortunately not in the best interest of the client in many cases.

Jill: So let’s just talk a little bit about those fees because your fees are south of 1% at Rebalance, somewhere like a ¾ of 1% is that about right?

Mitch: A half of a percent

Jill: A half okay. Is that all-in a half of a percent? In other words, the cost of the underlying investment is how much?

Mitch: Well, so when we buy funds for the clients and the average fees in all of the funds that we buy are 0.15% to say 0.2% in that range, if you add it all up we’re in the kind of two-thirds of 1% range, all-in.

Jill: Oh man, you calling me a liar for two-thirds versus 0.75% – all right I love you anyway. Listen, that fraction adds up over time so I’m with you.

Mitch: You and me, we’re precise people.

Jill: Indeed.

Mitch: I have to go toe-to-toe with you.

Jill: I love it. I mean it’s just amazing. That is such a huge difference than say, you know, even if you just look at the average investor who buys a managed fund without any advice, just buys a managed fund and has a portfolio with funds costing them close to 1% maybe a little bit less that’s pretty amazing. So, when we come back with Mitch Tuchman, Managing Director of Rebalance, we’re going to figure out how it is that he can provide his service so cheap, because that must be what you are thinking and it’s not that cheap is always better, but boy in this case it is. So, Mitch Tuchman will continue to join the program, and we’re also going to get him to weigh in on the U.S. Department of Labor’s new proposed rule and how that might impact his business

Jill: You’re back with Jill On Money. This is the program that takes the mystery out of your financial life. I’m Jill Schlesinger. We are so happy to have Mitch Tuchman join us. He is the Managing Director of Rebalance and before we went to the break Mitch was telling us about the fees for managing a retirement account at Rebalance which all-in are about two-thirds of 1%, so, Mitch, how do you do it? I mean if you look at the average advisor whose got, maybe let’s just talk about half a million dollar account, I would say that most advisors are charging about 1.0% to 1.25% for that and then the cost of the funds inside of it, maybe it’s 1.5% and you are doing it for so much cheaper. How so?

Mitch: Well, let’s not gloss over that point, Jill. At Rebalance when we talk to prospective clients, they think they are paying the advisor 1.0% or 1.25%, but what the advisors generally do not make super clear are what the fees are in the funds that they are buying for the clients. We have this conversation daily with people and it is very difficult for people to get their heads around this, but when you open up your account and look at your portfolio look for those line items. They will say, for instance, Franklin Templeton Global Growth Fund, I’m not pointing them out, but when you see an amount of $44,280 or whatever, that particular fund is syphoning money out of that amount every year. You’ll never see it, but it is being taken out and you need to know what that is. That is a fee you are paying in addition to the money you pay your broker to put the portfolio together and manage it and keep it in balance for you.

Jill: I mean just to put that in perspective though also, even if you are managing your own money, I just popped into Fidelity for a second and said okay what happens if I bought the Fidelity Focused Stock Fund …

Mitch: Right.

Jill: … has no transaction fee. I buy it for myself. Just for the fund I’m paying three-quarters of 1%.

Mitch: Yes.

Jill: I mean even at Fidelity, or any managed fund, you are paying up for that staff, who is trying to do research and find value, but that’s not what Rebalance does, you stick to the index/exchange traded fund universes, right?

Mitch: Yes. For most brokers, and the way they operate, they need their 1% of your money every year and they need to put you in funds that are 1% or more. Because, the funds make deals with the brokers and say “Hey Mr. Broker, if you buy my fund for your clients I’m going to charge them 1.0% or 1.25%, but then I’m going to kick back a 0.25% to you every year for getting my fund into your clients’ accounts.” That is what is called a conflict of interest. Your broker likely isn’t just being paid by you, he’s being paid by the funds that he is buying for you and that’s a conflict. That leads to you not getting the best deal, and so at Rebalance we do not operate under that model. We believe it is conflicted. We are paid only by the clients, but we use funds that are different than what most brokers use. They are called index funds, and they are not run by rock star stock pickers, they are run by computers that firms such as Vanguard employ, and those funds cost usually an eighth or a tenth of the price. When you asked me, Jill, how do we provide a better service for one-third the price. We just don’t use funds that are not in the client’s best interest, rather we use index funds; which are better funds that also happen to be a lot cheaper.

Jill: I was just interviewing a big economist and he said he thought that this concept of buying and holding even just a cheap fund was going to come under pressure in this next period and he said “I think that we’re going to have to see a little more tactical asset allocation” meaning that you are going to have to move your asset allocation around a little bit more and I still don’t get that – how do you know and where’s the proof that that actually works over time. I mean you guys don’t do that correct?

Mitch: We don’t, and there is no proof and I’m not sure who the gentleman was on your show, but generally people who say things like that, have incentive to have that belief. People like that get paid higher fees to make predictions of what is going to happen in the world and then they reposition portfolios accordingly. Usually, they sound incredibly smart and bright, and they are, but there’s no evidence to say that they are right. The other problem is that when they are wrong, the investor loses, but we do know what the markets are going to do over long periods of time. There’s a lot of science and evidence that markets are going to continue growing at certain rates of return. So, I know that if I can just capture that for our clients and charge them as little as possible to do that, it is a much safer way to go.

Jill: And frankly, I guess even if you did know where they were going to go, and you were right for the first decision, to continue to make those decisions seems like such a fool’s errand. I guess there are some big hedge funds who do it and there’s maybe some folks who can do it now and again, but consider that we mere mortals would do it seems a little crazy. Mitch, can you stick around for one more segment?

Mitch: Of course.

Jill: Oh sweet. So, we’re talking to Mitch Tuchman. When we return we’re going to have Mitch talk a little bit about how this new rule that the U.S. Department of Labor is about to announce around the fiduciary standard could change the industry and why it is good for him and Rebalance specifically. I think this is going to be a complete bonanza for you guys, but that’s just my thought.

Jill: All right, we are trying to keep Mitch Tuchman, the Managing Director of Rebalance here for as long as possible because he is a wealth of information. Mitch, we received the announcement that the Department of Labor rule will be coming out anytime I hear. I heard that maybe the first week of April, but could be sooner, and this is the rule that would require any retirement account provider to adhere to the fiduciary standard. How is that going to affect your business?

Mitch: Let’s just define what the fiduciary standard is because I do not think a lot of people understand this whole idea. Yes, what you said is completely accurate. The Department of Labor is raising the bar, raising the standard for anyone who gives financial advice on a retirement account (meaning IRAs predominantly). The person managing or giving the advice on your IRA has to operate at what is called a “fiduciary standard”, which means that I have to operate and put your interest ahead of my own and if I don’t, and you can prove that, you can sue me. Now, you may think that that sounds obvious, of course my financial advisor would do that, but brokers who are managing lots of money for people’s IRAs do not. Brokers who buy client’s annuities, who buy them high-priced mutual funds are not held to that standard. They are held to a lower standard today called a “suitability standard,” meaning if you’re a widow and I buy you a bunch of highly speculative tech stocks, you can sue me because that wasn’t suitable for you, but you cannot sue me for taking commissions on the funds I buy for your account. So, I don’t really have to demonstrate that I’m operating and putting your interest ahead of mine, thus the Department of Labor said we need to enforce those higher standards, these fiduciary standards with people’s employer accounts, such as 401(k)s and 403(b) accounts. But once the money moves out to an IRA, those standards are not enforced and all hell breaks loose. Evidence shows that as a result, people are getting much less lower returns in IRAs, which are retirement accounts, so we need to change that. We need to have regulation and oversight over IRAs; the DOL has been fighting for 4 years and, in a couple of weeks, the new regulations should finally be coming out. What that will mean, for the listeners, is that your broker is going to start being much more upfront with his disclosures about the fees you are paying in your accounts and the commission he is getting from the funds that he puts into your accounts. The fact that this is about to happen is causing firms to get out of the business, it is causing firms to say “we’re not going to service people anymore; we can’t do this because we can’t make enough money doing so.”

Jill: But you can?

Mitch: But we can because we have been waiting for this. So, first of all one way we do it is we use these lower priced funds I’ve mentioned, but I think it’s mostly a matter of how we run our business. We do not have offices where people can come in and get a cup of coffee and chat about the market, so we do not have a lot of brick and mortar out there and that lowers our costs. We do all of it on the phone. Secondly, there is a lot of technology that one can use to build an investment services business today that keeps down lots of costs like paperwork. You know, people have probably heard the term “cloud-based services”, but we built our company from the ground up with all kinds of innovative ways of running a business that way and I think last, and most important, our profit thresholds and requirements were just set much lower than a publicly traded or investor owned investment services firm. We think we have put a great package together so that people do get ahead with a level playing field and pure transparency and that alone begins to get a life of its own and now most of our business is coming through referrals. That alone shows we are able to do business like this, with the word still getting out without a lot of additional marketing expense as well.

Jill: Now, we just finished up with Mitch Tuchman, the Managing Director of Rebalance and one of the things that he mentioned in that last segment is a conversation about the fiduciary standard. I want to let you guys know that next week we’re going to devote an entire hour to really diving into this issue and we’re going to have a special guest join us and I think it’s really important, if you have your money managed by anyone in the universe out there, if you work with a financial sales person, an insurance person, anyone in the industry next week’s show will be the most important show that you could listen to. It is going to be huge. So, we’re waiting to see when the Department of Labor releases this new rule. There’s still going to be efforts to squash it when it comes down. Again, this is a rule that is going to make those who serve retirement investors conform to a standard that puts your best interest first. This is so important. It is a key issue. It is not about how the advisor is compensated; it is about the standard under which that financial professional must operate and, again, you know that there are people in the financial services industry who are wonderful people, they sell commission based products, there are folks who do fee-based planning and they stink. It doesn’t mean that one is good or bad it means that we want to put the odds in your favor that you are getting the very best advice that you can get, that is in your best interest. If you have inherited a big portfolio of a bunch of ETFs and you don’t need to do anything you might want to let it sit there. Maybe you don’t need a fee-based advisor. You might not need that okay. I get it, but we really need an industry that has to put clients first. That’s absolutely first and foremost in any reasonable industry. All right, thanks again to Mitch Tuchman for showing up today and thank you for listening.